Foreign direct investment (FDI) used to sit in the background—important, but distant from day-to-day strategy. That’s no longer true. Today, massive capital commitments into areas like AI, semiconductors, and clean energy are signaling which industries will scale, where supply chains will land, and which regions will dominate. In this episode of The McKinsey Podcast, McKinsey Senior Partners Nick Leung and Olivia White explain to Editorial Director Roberta Fusaro why FDI has become a critical early indicator of competitive advantage—and what leaders should be watching now.
The McKinsey Podcast is cohosted by Lucia Rahilly and Roberta Fusaro.
The following transcript has been edited for clarity and length.
FDI in the spotlight
Roberta Fusaro: We’re talking today about a recent MGI report on foreign direct investment. For many years, it seemed as though FDI was nothing more than a background economic variable, but it now seems as though CEOs should be looking at FDI as more of a strategic signal and not a finance or a government relations topic. Why is that proving to be the case?
Olivia White: What seems to have happened over the past three, four, five years, perhaps not surprisingly, is on the one hand greenfield foreign direct investment, or dollars that go toward new production capacity or expanding production capacity, has shifted significantly toward what we’ve called “future-shaping industries,” things like AI centrally, advanced manufacturing of many sorts, including EV and batteries, and also resources in the energy that support it.
The dollar amounts have become bigger, so there are many more—and bigger deals—deals of $1 billion or $10 billion or even in one specific instance $100 billion. And they’ve become more geopolitically tied. And we believe that, first, you can read a bunch of competitive dynamics in what that flow looks like, but you can also see where trade and competition will be in the future.
Because the dollar announced or that goes into the ground today tells you something about where things will be produced, who will be trading, and who will be competitive in the future. And that’s that future signal that leaders of businesses need to care about.
The dollar announced or that goes into the ground today tells you something about where things will be produced, who will be trading, and who will be competitive in the future.
Nick Leung: The FDI is pretty interesting as a kind of upstream indicator, and the patterns of trade and how trade is changing due to geopolitics, due to macroeconomics, et cetera. And so we said, “Well, why don’t we go upstream? Let’s look at FDI and look at what the signals are now in terms of where the FDI money is going, because it might tell us something about where trade goes next.”
If we’d done this pattern 15 years ago, we’d have seen all the money going to China, which created the manufacturing base, which then we had trade with China that followed. It’s a very similar thing. And now what we’re seeing is that it’s not focused necessarily on geographies. Of course, geographies are very important, but it’s focused really on the future-shaping industries that Olivia just mentioned.
A swath of opportunities
Roberta Fusaro: The report mentions that three quarters of recent FDI announcements are going into these future-shaping industries. What does this imply for CEOs who are maybe not already in the top tier of the global players in AI, manufacturing, EV, et cetera? How do they need to react?
Olivia White: This is also a question about what it means for people who aren’t in the bull’s-eye of the future-shaping industries. And we would contend that it has implications for those players too, or at least potential implications that they might be looking at.
A lot of investment ends up being place based. Like a big energy project or a mine to create a big data center to power AI, computation or training, or a manufacturing facility that different players can plug into.
If I am building a factory, there are all sorts of suppliers that will have to come into play. The power demands will shift, even for things like hotels or food. There’s a range of considerations that people across industries can think about in that context.
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There’s also a broad range of considerations from competitive demands. And if you’re looking at money that your competitors are putting in the ground, you can start to say, “Do I have something as a competitor that’s building a foothold to produce in the new market where I sell or where I want to be selling?”
Somebody puts money into an EV or a battery factory in Brazil or Spain or Hungary, I might think, “Do I want to be on the ground there? What’s that a bulkhead for? How do I want to respond?”
And I can think about that both at the level of the investing company but also for the full ecosystem. How’s the ecosystem going to shift? What’s that going to mean for my base of competitors?
Nick Leung: The analysis we did essentially looked at a period pre-COVID. So, we looked at the late teens, sort of 2015 to 2019, and then essentially from 2022 to 2025. We’re looking at the old world and the current world. And the old world was less characterized by where things were done. The world is flat paradigm, where you’ve got a factory, you put it wherever you can get the lowest factory costs, highest efficiency. That paradigm of the world ignored where things were done.
What has happened in the last few years is a far greater understanding of both the implications in terms of jobs but also, for example, strategic implications. So geoeconomic in the sense that where things are made have a whole bunch of important strategic implications.
People want to have, for example, battery manufacturing done closer to where they’re going to need those batteries, or people are going to want to have semiconductors in many more places than they have today. This idea of where things are made has become so much more of a focus.
The role of technology
Roberta Fusaro: What’s the role of technology in all of this?
Olivia White: Technology has been a facilitator of where people want to trade for quite some time, and it was a core dynamic in what happened over the past 20, 30, 40 years that we’re talking about, because it enabled people to decouple some manufacturing activities from the software activities that powered the design, et cetera.
So, you could pick where you wanted to do the various activities based on considerations of capability and cost and broad productivity all in. And just to make that explicit, I could run an AutoCAD design program sitting wherever I wanted that, in principle, I used to design a given product, say an engine.
But then I would have that engine manufactured somewhere where, in fact, we had high capability, and a combination of labor costs and capital costs and energy costs, et cetera, were economically advantageous to me, very much enabled by technology.
Now if you said, “I want to start to try and build something in a place where I haven’t been building it before,” all of a sudden, you must think about: “Do I have the technological capabilities to do that?” And on one hand, now that the technology has advanced, maybe it’s easier to do it in more places.
On the other hand, technology is not just a matter of theoretical know-how. It’s a matter of a lot of practical and process know-how. We talk about a 3D printer will allow me to print something anywhere. If there are factories in China that have immense know-how in how to produce specific things at very large scale, who’s going to be able to replicate that, at least as quickly and to the same extent?
Nick Leung: I think the next most important word in this whole debate is indeed “technology.” Because I think we’re seeing the new world being built. When I say the “new world,” I mean the world which is around green tech, around AI data centers and what they require, around semiconductors, and around where they’re made.
This is where all the money is going. This is where everyone’s attention is, both in terms of business as well as in terms of policymakers and politicians. All of these things require massive amounts of new capital investment to go into the ground.
What FDI is showing us is how this world is being built and where it’s being built. And so if you look at green tech, for example, you look at the amount of batteries that are being built everywhere, you’re looking at new solar parts being built all around the world, these are very capital-intensive enterprises.
And these are big, big deals. If you look at China, inbound FDI is drying up because of all the economic difficulties they have faced over the last few years. However, China is now exporting capital as it’s trying to build some of this green tech infrastructure outside and as there’s a demand for that in many parts of the world.
Semiconductors are creating those ecosystems, which are incredibly beneficial, but they’re very isolated for the moment. People are trying to do that. You look at these massive semiconductor announcements that have gone into building semiconductor capacity in the US.
That’s a big driver. This is the future of the world that’s being built. AI data center announcements within the last year or so are dominating because they’re huge investments, and they’re made in places which make sense in terms of potential demand. This is the future. We’re seeing it be built through these massive capital commitments that have been made globally.
What FDI is showing us is how this world is being built and where it’s being built.
The impact in Europe
Roberta Fusaro: Olivia, looking at this from a more global perspective, can you talk about what’s happening in Europe?
Olivia White: Europe really is in a very equivocal place. It has attracted a lot of FDI. However, the amount it is attracting in future-shaping industries is a lot less than that of North America, which we believe is a clear signal of perceived competitiveness.
And I’m looking at extracting intra-European investment here, the money into Europe from outside. And, indeed, a lot of the investment that’s come into Europe has been in green energy. Now, what does Europe need? Well, in order for Europe to revitalize growth and productivity improvement, and to take advantage of potential productivity-enhancing technology like AI, it very much needs investment in both those technologies, as well as general investment overall. So you see the sort of deficit of competitiveness, but you also do see not an insignificant amount of money going in. It will take a focus on reform measures and a host of other business-friendly steps.
How big is the FDI investment?
Roberta Fusaro: Nick, did the data reveal any one particular sector—AI data centers, semiconductors, batteries, energy—that would most dramatically reshape global trade?
Nick Leung: All the ones I mentioned are going to be huge. Those are massive, and they’re very intertwined in a sense that they all play together. You have an AI data center. You need green energy to supply it. You need all the semiconductors to actually make it work.
They all come together essentially in many of these investments.
Olivia White: When we say they’re all big, to give a sense of just how big and how we’re seeing the future now, if you look at the dollars going into FDI projects in various geographies and you say, “Well, what will that mean for increasing capacity in the future?”
If you look at FDI projects just since 2022 in the domain of battery production, they could more than quadruple manufacturing capability outside of China. But other countries are investing too. It could nearly double the data center capacity that powers AI across the world in places outside of the US and China.
These are huge increases in investment in those places. In the case of semiconductors, specifically leading-edge semiconductors, you can debate that the huge inflows of capital into the US could completely shift the balance of who the leading-edge semiconductor producers are, bringing the US into that circle. And that’s why all of these, plus the removal energy, matter tremendously. Sometimes we say 10 percent is a big increase or 20 percent is a big increase. This is 400 percent, 200 percent.
FDI in the domestic market
Roberta Fusaro: Amazing. That’s amazing. We talk about the importance of the where, and it seems as though from the research that the US appears to be a major beneficiary of recent FDI shifts. China has pivoted to become sort of a major outbound investor. How do you interpret this rebalancing? What lessons can CEOs draw from this pivot or this shift?
Olivia White: I don’t think there’s any great mystery buried in those numbers. So, in the case of the US, there are a lot of questions about exactly what role the US is going to play. How are multinationals going to position themselves vis-à-vis the US? However, it is very clear that the amount of money that’s been promised into the US has gone up a lot.
And it’s gone up particularly in semiconductor manufacturing, and in certain areas of advanced manufacturing more broadly. People are investing less inbound in data center builds in the US. And that’s because the biggest tech companies at this stage investing in AI data centers are American.
The US is at least in some form very intent on figuring out how to develop manufacturing capabilities, at least in certain areas, and has tried to attract money to it in different ways. And at the moment, that seems to be happening, and at least by our tracking, these projects are moving forward.
And so everybody really does need to be thinking about what role they’re going to be playing in the US market, and what that means about the degree to which they’re going to be manufacturing here. There are a lot of things that could go wrong.
These things are not easy to do, particularly not easy to do in areas where you have either atrophied or just not developed capability. You need real development of human capital and skills, both specialized skills but also specialized skills of a more traditional craft like welders. And it’s a very big value of the market.
Nick Leung: There’s been a flow of money into the US market because of the recognition that over the long term, the US market has delivered better returns than any other market by quite a considerable distance.
It’s also created the bifurcation between GDP growth right now in the US. It is so far from what it is in Japan or Europe, even though at one point in time, they used to be quite similar. But you also see this recognition of returns. And similarly, the flip side of that is a recognition that in China today, particularly over the last few years, those returns haven’t been as apparent as they were in the past.
And so you’ve had a recalibration of the attractiveness of investment returns, which has also driven more money and more commitments to the US market. It’s not just the policy considerations which have their own language and are obviously crucial, but also the fact that investors can justify those investments quite easily. It’s a kind of situation where both policy and economics are telling the same story.
Next steps
Roberta Fusaro: For countries and companies that want to make FDI work, you have to have certain capabilities. Were there any best practices that were revealed through the research?
Olivia White: We found that more often than not, about 60 percent of the time, when FDI was outsized, an industry grew. So good chances, but not sure odds at all. And so we then said, “In those cases that were successful, what was different about them from the cases where the growth wasn’t successful?” And we found a couple of factors that were crucial. One, you had a human capital ecosystem that helped make sure that there were people on the ground who understood the technology and could build out the technology, and also have people who were trained more specifically, for example, to work in factories or in ecosystems of suppliers around those factories.
The second was domestic investment started to pile in, too. And then the third thing is that this was happening in ways that allowed the industries to plug into global supply chains, so they weren’t twirling on their own to make things for domestic or narrow regional markets, but were able to start selling to a broad global market.
Nick Leung: I think many of them feel that relative to a few years ago, there is more uncertainty around parameters today than before, certainly if you look at recent things like changes in tariffs, geopolitical realignment, and potential further realignment.
And so why is it that we’ve seen this huge shift toward future-shaping industries? In future-shaping industries, you can’t wait for semiconductors because in a few years, everything will have changed again. And if you don’t act now, you may be left completely behind.
Roberta Fusaro: At the end of the day, what are the top two or three messages for CEOs from this FDI report?
Olivia White: Things are happening today that will change the shape of the competitive and geoeconomic future. And you can’t wait to ride it out to see what that will be. Two, there’s a set of industries in which action needs to be at large scale to work, and it helps to set the scale for entry to play, which is different in different markets. The third thing I would say is, energy resources still matter. The conventional seeds of FDI are still very, very much at play.
Things are happening today that will change the shape of the competitive and geoeconomic future. And you can’t wait to ride it out to see what that will be.
Roberta Fusaro: Nick, any messaging from your end?
Nick Leung: The challenge decision-makers face today is that the very assumptions they go into a decision with have shifted. And so it’s not just what you’re looking at that’s shifted. It’s also the lens with which you look at it that needs to also adapt to what’s happening in the world. What are your assumptions that you’ve had for the last decade which are no longer valid?
